Interest rates in the U.S. are at the highest level in more than two decades. With the Federal Open Market Committee (FOMC) due to meet on Sept. 20, there are speculations on the next course of action. ING believe that the FOMC will hold rates steady, but signal a final hike. In all probability, the market has already discounted the factor of another rate hike before 2024. To stay ahead of the curve, it’s important to look at stocks to buy based on the potential course of monetary policy action in the next few quarters.
Another expert opinion suggests that the Fed is done with rate hikes. It’s likely that the policymakers will cut rates in 2024. In my view, this seems more likely and I would bet on specific themes or sectors that will benefit from a potential rate cut. It’s important to note that a rate cut would translate into a weaker dollar. Further, lower interest rates would support relatively higher leveraged investment and consumption spending.
Let’s discuss three stocks to buy that are likely to trend higher as they discount the potential action from policymakers in the coming quarters.
Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) stock has remained sideways to lower year-to-date. I however believe that the stock is attractive at a forward price-to-earnings (P/E) ratio of 8.6. Further, RIO stock offers a dividend yield of 5.38%. And, their dividends are sustainable considering the Company’s free cash flow.
The important point to note is that Rio reported strong results in 2021 on the back of higher commodity prices. However, the trend in revenue and EBITDA has been downwards in the last 18 months. The reason being monetary policy tightening and its impact on global GDP growth.
However, with interest rates peaking out, I expect better days ahead for commodity prices. As a matter of fact, iron ore is already trading at its highest level in months. As price realization improves, Rio will be positioned to deliver higher free cash flows. Given the valuation, I would not be surprised if RIO stock trends higher by 30% to 50% in the next 24 months.
Newmont Corporation (NEM)
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Newmont Corporation (NYSE:NEM) is another name among stocks to buy ahead of the FOMC meeting. The gold mining stock trades at an attractive forward P/E ratio of 19 and offers a dividend yield of 3.97%.
An interesting point to note is that even with monetary policy tightening, gold is trading at $1,926 an ounce. This is indicative of the fact that gold is an undervalued asset class. Once expansionary monetary policies are pursued, I expect the precious metal to surge higher. NEM stock has remained sideways in the last 12 months and a breakout rally might be in the cards.
In terms of fundamentals, Newmont has an investment grade balance sheet. This provides high financial flexibility for investment in the Company’s quality asset base. Further, as gold trends higher, free cash flows will swell and provide headroom for robust dividend growth. I must add that the Company’s exposure to copper assets is likely to be a value creator. The metal will see sustained demand on the back of global decarbonization investments.
Chevron Corporation (CVX)
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Chevron Corporation (NYSE:CVX) is another undervalued stock that’s worth buying before the FOMC meeting. CVX stock has remained sideways in the last 12 months and offers a dividend yield of 3.63%.
It’s worth noting that oil is already trading above $90 per barrel. A rate hike pause and potential rate cut in 2024 is good news for black gold. Chevron, with an investment grade balance sheet, it worth considering.
From a fundamental perspective, Chevron expects to invest $14 to $16 billion annually through 2027. These investments will translate into steady revenue and cash flow upside. It’s important to note that the big investments can be funded through internal cash flows.
To put things into perspective, Chevron reported operating cash flow (OCF) of $6.3 billion for Q2 2023. This would imply an annualized OCF of $25 billion at a time when realized oil price was around $80 per barrel. With a possible rally in crude oil, Chevron will be positioned to create value through dividends and repurchase.
On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
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